The Economist magazine leads this week with an article on Germany’s large current account surplus and the problems it is causing the rest of the world.
This surplus, which means that Germany is lending its equivalent abroad, is equal to the excess of national saving over national investment.
It means that the rest of the world is running a current account deficit with Germany, since the sum of all the world’s current account surpluses and deficits is zero. If the rest of the world is running an overall deficit with Germany, this means that it is accumulating debt, funded by Germany lending its net savings, or the savings that are not invested domestically.
I have discussed these matters in previous posts, but the article cited above makes a useful point. The potential for reducing the German current account surplus is being played out as a conflict between economic and institutional forces.
The economic forces stem from a tightening labour market at something like full employment, plus rising house prices, which are putting upward pressure on wages. The institutional factors can be seen in the tradition of cooperation between employers and trade unions. This can often result in the trading of lower wages for greater job security, which continues to restrain earnings.
Germany’s export competitiveness over the last decade is seen by many Germans as a sign of success. It has been built on the aforementioned wage restraint, the Hartz labour market reforms of former Chancellor Gerhard Schröder, and domestic economic weakness following the collapse of the IT bubble in 2000.
These three factors have boosted exports and dragged down household income, resulting in a rise in corporate saving or retained earnings. The weakness of consumption caused by the fall in household income has reduced domestic investment opportunities, creating a surplus of corporate saving over investment. The surplus has been lent abroad, financing current account deficits in countries such as the US, UK and peripheral Europe.
The conflict between the economic and the institutional means that a major rebalancing of the German economy in the form of a move towards balancing its current account is not straightforward.
Rebalancing requires policy and institutional changes in order to promote the desired economic adjustments. This does not rule out a new pact between employers and unions. But it would have to mean higher wages in order to boost household income, and greater public investment in necessary infrastructure.
Such changes would benefit ordinary German workers. The global rebalancing that results would also make the necessary deleveraging of economies with high levels of private and public debt possible, while sustaining global growth. Any sustained recovery from the legacy of the Great Recession requires such a reduction in the share of debt in GDP in many countries.
This matters to economies like the UK, which needs to rebalance in the opposite direction to Germany by reducing its current account deficit and its dependence on excessive credit to fuel growth.
The recent devaluation of the pound does not seem to have significantly reduced the UK’s trade deficit, which shows that it is not just the narrowly economic which affects such imbalances, at least in the short term. Policy and institutions matter too. Any reluctance to embrace change in Germany only makes the necessary rebalancing of the global economy harder.